Choosing How Much to Contribute to a 529 College Plan

September 6, 2022

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For many people, creating generational wealth includes helping cover the cost of college for their kids. But what does that actually mean? You don't want to save too little or too much. If you've ever found yourself wondering how much to contribute to a 529, this is the post for you!

We'll dig into what exactly a 529 college savings plan is and then cover what happens when you save too much (or too little!). Plus, we'll share one of our favorite tools, Fortunately, to eliminate the overwhelm that sometimes happens when deciding how much to save.

What is a 529 College Savings Plan?

Before you determine how much to contribute to a 529, it's important to be clear on what one is. Let's do a quick crash course on all things 529!

A 529 college savings plan is a saving tool that can be used to cover the cost of college and other qualified educational expenses. 529 plans get their name from the part of the IRS tax code that details how these savings plans work.

The short and sweet version is these special savings tools allow the money you put in to grow tax-free. When the funds are withdrawn for qualified educational expenses, you don't have to pay any federal income taxes or penalties.

Examples of qualified educational expenses include:

  • Tuition and fees
  • Supplies and textbooks
  • Room and board
  • Technology, such as computers and related equipment 
  • Repayment of a portion of student loans 

529s aren't just for college. You can actually use the funds to pay for trade school or vocational school. Additionally, you may be able to use the funds to pay for qualifying K-12 tuition.

In some states, you can also receive an income tax benefit from making contributions to 529 plans. It varies by state, but many offer either income deductions or state tax credits.

Learn more about 529 plans and other college savings options here.

Figuring Out How Much to Contribute to a 529 Plan

It's no small task to figure out how much to contribute to a 529 plan. You don't want to save too little, and you also don't want to save too much. Let's explore both ends of the saving spectrum before we figure out how to find a comfortable middle ground.

Not Contributing Enough to a 529 Plan

The biggest drawback to not contributing enough to a 529 plan is that it might put college out of reach for your children.

We don't want to alarm anyone, but if you haven't sat down with a college cost calculator recently, you might be in for a rude awakening. It's one thing to listen to sound bites about soaring college costs and another thing entirely to see the cold, hard numbers on the screen.

There are a lot of variables when it comes to the cost of college, such as the type of school and how old your child currently is. To paint a picture of how important it is to save, you should know that a 5-year-old child who plans to attend a four-year public college can expect to pay about a quarter of a million dollars for tuition and housing if college tuition inflation continues to move at 7% per year.

Yikes!

Contributing Too Much to a 529 Plan

Of course, there's a lot to consider when it comes to speculating about future college costs. The calculator estimates are eye-popping.

However, many people argue that higher education is headed for a major disruption that might send costs crumbling. Even if that doesn't happen, college costs can also be brought down in other ways. Everything from AP credits and scholarships to work-study programs and loans can help make the sticker price of college tuition less shocking.

If you don't know how much to contribute to a 529, you run the risk of contributing too much. That could mean getting hit with penalties and taxes if you want to use your 529 funds for anything outside of qualified education expenses.

Luckily, there's a tool that can help! Fortunately actually allows you to determine what's the best amount to contribute to a 529 based on your specific situation.

Fortunately Simple Saving Chart

They look at factors like how many years away college is and combine it with other details, including your current 529 balance and what you expect the annual cost to be. Fortunately also factors in your other goals and your current money plan to help you determine how much to contribute to your 529.

How Much is the Right Amount to Contribute to a 529?

You don't want to save too much or too little. So how do you determine the right amount?

This is really personal. Some families aim to cover the full cost of college for each of their children. Other families, like ours, are only looking to cover part of the cost.

Right now, we would like to pay for half of our kid's expenses. The rest of the college cost can be covered with a combination of scholarships and part-time work.

We'd like them to have some skin in the game, and we also know that students who work a few hours each week actually tend to earn better grades.

Don't Forget 529s are Flexible

To help take some of the stress away from needing to get too exact with your contribution goals, remember that 529s are flexible.

Let's say that your child actually earns a pretty hefty merit-based scholarship. It knocks out a huge chunk of the college costs. Is all that sacrifice and saving that went into their 529 good for nothing now?

Not at all. Students who earn scholarships can withdraw the scholarship amount from their 529 penalty-free.

There are other aspects of a 529 that make them more flexible than you might initially realize. Since you can change the beneficiary on a 529, you can actually pass the funds down to another child, niece, nephew, or even a grandchild. Or maybe graduate school would lead to a pay bump or allow you to pivot into a better-paying or more satisfying career. You can actually use the 529 funds as well!

Not every child is headed for the traditional four-year college path. 529 plans can also cover the cost of trade school and other qualifying expenses.

My wife recently did this. She went back to school to become an esthetician. With our healthy 529 funds, her trade school costs were covered!

You Still Don't Want to Over-Save in a 529!

So if 529 plans offer that much flexibility, why not contribute as much as you can? Simply put, you likely have other goals!

Remember that student loans are always an option but there is no such thing as a retirement loan. You want to make sure that saving for your kids' college isn't going to jeopardize your ability to take care of yourself in your golden years.

Plus, you are likely also looking for balance in other ways. Saving for college is an incredible gift to give your kids. But there are myriad other experiences that you likely want to enjoy as a family while your kids are young. That's time together you'll never get back!

Overall, it's important to think hard about how college savings can fit within your overarching financial plan.

Where to Open a 529 Plan

couple looking at laptop
Photo by Kindel Media

Once you have an idea of how much you'd like to contribute to a 529 plan (remember that our family is aiming for half!), it's time to open an account. You can open a 529 plan with many of the most popular investing platforms and brokerages. However, you likely want to do a bit of homework before opening an account.

Since some states offer tax benefits on 529 plans, it's important to look at the requirements for opening an account if your state is one of them. If you don't open your account correctly, you might regret it come tax time!

If your state doesn't offer any tax benefits, you have a lot more options to explore. Many people choose an investing platform that they are already familiar with. Does your family have a Roth IRA with Vanguard? Then maybe you want to look at their 529 options as well.

Since we live in Michigan, our family went with our Michigan state plan given that we can receive state tax deductions on our contributions.

No matter which platform you choose, one of the most important considerations to make when opening a 529 plan is reviewing the fees. Fees can take a bite out of your overall savings. By carefully reviewing the costs associated with opening the account and determining if there are any management fees, you can keep more of your money working for your kids' futures.

Final Thoughts on How Much to Contribute to a 529

There's a lot to consider when it comes to deciding how much to contribute to a 529. Like so many other parts of family finances, the answer is likely unique to your family situation.

If you're looking to remove some of the guesswork, Fortunately is a powerful resource. You get ongoing guidance on how to save for college and reach other money milestones based on your finances. It's true that there's no crystal ball when it comes to knowing exactly how to prepare your kids for college. But Fortunately might be the next best thing!


Are you planning to help your kids cover the cost of college? How did you determine how much to contribute to a 529?

Please let us know in the comments below.


Andy Hill

Andy Hill is the award-winning family finance coach behind Marriage Kids and Money - a platform dedicated to helping young families build wealth and happiness. Andy's advice and personal finance experience have been featured in major media outlets like CNBC, Forbes, MarketWatch, Kiplinger’s Personal Finance and NBC News. With millions of podcast downloads and video views, Andy’s message of family financial empowerment has resonated with listeners, readers and viewers across the world. When he's not "talking money", Andy enjoys watching his kids play soccer, singing karaoke with his wife and watching Marvel movies.

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